I am a securities law attorney at Wiand Guerra King in Tampa, Florida, where my practice includes complex commercial litigation and regulatory matters, with a focus on securities and financial services litigation. I am also part of the team representing the court-appointed receiver of Arthur Nadel's $400 million Ponzi scheme, and have particular expertise in the area of Ponzi schemes. In addition to my law degree, I also hold a Masters in Business Administration from the University of Miami. In my spare time, I also publish the Ponzitracker blog, which tracks the proliferation of Ponzi schemes both nationally and internationally. Feel free to follow on Twitter at @Ponzitracker. All opinions expressed are solely that of the Author. This blog is not intended, nor should it be construed, as legal advice.

Feds Halt Alleged $600 Million ZeekRewards Ponzi Scheme: How It Happened And What's Next

On Friday, August 17, 2012, the Securities and Exchange Commission (“SEC”) filed an emergency action in a North Carolina federal court, alleging that ZeekRewards and its founder, Paul R. Burks, were involved in one of

(Photo credit: Wikipedia)

the largest Ponzi schemes in history. The move came as many began to question the legality of the operation and whether its promised 1.5% daily returns were simply ‘too good to be true.’ These fears were confirmed on Friday, with the unavailability of Zeek’s website and the closure of its Lexington, N.C. headquarters serving as an ominous sign leading up to the SEC’s announcement Friday evening that it had halted the scheme as it teetered on the “verge of collapse”. The sheer number of victims, which authorities estimate tops 1 million, likely earns Zeek the infamous distinction as the largest Ponzi scheme in history by the number of investors, and will add a layer of complexity never seen before in trying to unravel the scheme and distribute funds to investors. For sake of comparison,the number of investors in Bernard Madoff’s $65 billion Ponzi scheme, the largest in history by investor losses, was “only” in the thousands.

According to authorities, Zeek consisted of two related operations, Zeek Rewards and Zeekler. Zeekler was an international penny auction website that offered users the ability to win merchandise by placing one-cent “bids”. Zeek Rewards was the investment arm of the operation, offering users the ability to share in up to 50% of daily “profits” by completing a daily set of tasks that included soliciting new customers and selling or giving away “bids” to new users. At the end of the day, users were paid “Profit Points” usually totaling 1.5% of their investment, and were given the choice either to receive their “profits” in cash or rollover the points to compound future returns. Many chose to re-invest, and due to the compounding nature of the Profit Points and the steady stream of new customers, authorities allege that the number of outstanding Profit Points was nearly 3 billion at the time the scheme was halted. The scheme depended on investors choosing to reinvest their profits, for according to the SEC, Zeek would have been insolvent in a matter of weeks, if not days, had investors chosen to receive their profits in cash.

No doubt in efforts to avoid the scrutiny of federal and state authorities, Zeek made it mandatory for new users to acknowledge that they “are NOT purchasing stock or any other form of ‘investment’ or equity” before becoming a member. While Zeek dubbed the operation as an “e-commerce subscription”, the SEC disagreed, charging that, in reality, the company was engaging in the fraudulent offering of unregistered securities.

In its announcement, the SEC also stated that Paul Burks, Zeek’s founder, was cooperating with authorities and had agreed to pay a $4 million civil penalty and relinquish all interests and assets in the company – all without admitting or denying any culpability. Burks cooperation should be seen as a positive sign for investors, as his knowledge of the scheme will significantly help authorities unravel the operation and account for all assets. According to the SEC, Zeek has paid over $375 million to investors to date, and currently holds approximately $225 million in investor funds in financial institutions all over the world. These funds were frozen in an emergency asset freeze granted by the North Carolina federal court, meaning that they cannot be dissipated or misappropriated during the course of the investigation.

Zeek and its affiliates have attracted scrutiny in recent weeks as investors increasingly began to doubt the operation’s legitimacy. According to David Dalrymple, President of the Winston Salem Better Business Bureau (“BBB”), the BBB had been receiving complaints for some time, and within the last 30 days alone had received 30,000 inquiries about Zeek. Said Dalrymple, “In twelve years as the President here, I cannot compare that to any level of inquiry for any other business. Ever.” Dalrymple stated that the BBB’s analysis of Zeek had raised many red flags, and that it immediately notified criminal authorities.

While investor losses pale in comparison to those experienced by Madoff or Stanford investors, the sheer number of Zeek investors is on a magnitude that has never been dealt with before in a receivership or bankruptcy context. To illustrate, assuming Zeek had one million investors, a simple 1-page summary for each investor summarizing contributions and withdrawals, stacked together, would be 101.3 meters high, or roughly 300 feet. The staggering number of victims suggests that investigation of the fraud and establishment of a distribution process will likely be a drawn-out process involving hundreds, if not thousands, of people.

Going forward, the first step will be the appointment of a receiver by the North Carolina federal court. In an Order filed late Friday, United States District Judge Graham Mullen appointed Kenneth Bell as the temporary receiver, empowering him to take control of Zeek’s assets and begin an investigation. Mr. Bell is a Partner at the Charlotte office of McGuireWoods, where his practice includes white collar crime. It is likely that Bell took control of Zeek’s offices yesterday immediately after the Order was signed. In the Order, Judge Mullen also ordered Burks to provide a list of all assets, employees, and creditors of Zeek to the Receiver within 10 days, and a full accounting of assets, bank accounts, and other property within 30 days.

For now, the North Carolina Attorney General has established a hotline for concerned investors at (919) 716-6046.

(08/20) EDIT – Forbes has confirmed that Burks is being represented by Noell Tin of Tin Fulton Walker & Owen, a Charlotte, NC law firm.

(08/21) EDIT – The Receiver has announced the establishment of a Receivership website at www.zeekrewardsreceivership.com. Victims wishing to communicate with the Receiver should email info@zeekrewardsreceivership.com.

Post Your Comment

Post Your Reply

Forbes writers have the ability to call out member comments they find particularly interesting. Called-out comments are highlighted across the Forbes network. You'll be notified if your comment is called out.

Comments

According to my knowledge the FTC and SEC say anything that is presented to people and the fast majority see it as an investment, its an investment. And pretty much it was. Of course they were making a profit untill guys who had around a million VIP started cashing out lol. just 30% of that would have been like 4500 a day and 31500 a week and thats just one guy. I fell for it too so i’m not hating but this thing was a total scam. The penny auctions may have covered some of it in the begining but i don’t see how anyone can deny this. Paulie Burks saw this coming and let it roll onwards.

I would like to comment on the fact that if there are 1 million Affiliates in Zeekrewards, wouldn’t it make sense that the people that should even be considered in getting a refund would be those who put in money but did not even have time to withdraw any. Remember there was a 2 week “drag”, meaning if you requested money on August 11th, Zeek did not even release that until 2 weeks later, that is, if they were on time, which means it is sitting in our commissions report. When I enrolled in April, I heard there were about 250,000 people in Zeekrewards, and I would venture to say that most of them had gotten their initial investment back. Everyone received in the Commissions report in their back office on the 12th of August, 2012 a 1099. Look at each person’s, if they are paid in full, why print it out? It will save 1000′s of pieces of paper. And if they just enrolled with $10,000, see how much they have received back and if they qualify for a refund, bingo, they are one of the lucky ones. Two levels up from me put in $45 last year and was receiving $2-5000 a week; yes she was working to enroll people but after getting $120,000 out over the last year, would she be a candidate for refund? uh, I don’t think so. Please consider the reasonableness of what I just said, maybe it will expedite this process and leave enough money for those who deserve to get their funds back. Thank you for considering my comments, Jeanne

Jordan, you don’t even know what the crap you’re talking about! this just started this weekend and your reports are as if you’re glad of other people’s failure’s. You’re the reason why companies go south, and you get paid for it. I’ve seen numbers from other official sites that do not even come close to adding up to your insults. You’re already calling this a proven Ponzi Scheme, and the investigation has just started. What, are you a hacker into their systems and know what the real numbers are? And even if you are right in the end, I’ve seen the SEC take their merry time on banks as hundreds of thousands of people lost their homes in the last 4 years do to the economy, and are now finally just regulating the banks so that this doesn’t get more out control than it already is. And for 1-1/2 years people have found an honest company like Zeek that has helped save hundreds of thousands of personal homes from closing down, and they close their doors just like that? Ponzi scheme or not, at least someone has provided for a means to help people. I have witnessed it myself. I have never seen or heard of,(and I read a lot of blogs) anyone that has ever not been paid since the company started. And maybe they did let an honest thing get out of their hands due to the facts that they had a huge successful idea skyrise into a territory that has not been seen or chartered. They could have done what most the Ponzi schemers do and start their companies out of the United States so that they are not regulated nor responsible for when the their company goes broke. Paul Burkes didn’t run. Oh, he could have, and with several million dollars. So give me a break, and give him and everyone in this company a break.

Let’s think about it and listen what others say. WE ARE THE PEOPLE…! https://petitions.whitehouse.gov/petition/support-keeping-zeek-rewards-open-stop-sec-and-attorney-general-stealing-our-business/YTbTXj3q?utm_source=wh.gov&utm_medium=shorturl&utm_campaign=shorturl

If Zeekrewards is down, do you think that THEY will not take you, your business and your family DOWN in some day… ,!!

Jordan: I bet you had no idea of the can of worms you were opening when you wrote your article. Welcome to my world. At least they are civil when they call you names. I think in the past 9 years I have been called every name in the book and then some. It is what happens when their Ponzi de Jour gets shut down. We have all the conspiracy theorists, which is what is taught to them when they join these programs, then we have the person running the program is honest as the day is long, when they can’t realize he has been lying to them from the beginning.

It is obvious that none of them have bothered to take the time to read what Paul Burks had admitted to in his plea deal in the SEC complaint. The same thing happens in every Ponzi that is taken down. The same thing happened in the ASD Cash Generator case with Andy Bowdoin out of Florida. Any was a piker compared to Paul. Andy only raked in a little over $130 Million, but the Secret Service was able to freeze close to $90 Million in that case. Mr. Bowdoin was charged criminally and he also made a plea deal and will be sentenced on August 29.

Maybe the feds should have just let Paul run this about 2 months longer before he ran with all the money and they were left without anything. Then they would have been screaming why the government didn’t step in and save them.

Paul Burks honest? Everything he said was a lie and Zeek was built on a house of cards. But this is what happens when people are desperate, and Paul knew this. He preyed on their desperation, and they bought it up hook, line and sinker; as you can see from the posts about your column and also from Ms. Touryalai’s column.

But anyone can make $40,000 per month and only work 15 minutes a day placing an ad. Anyone interested in buying a bridge?

All of you Zeek supporters really should read what Paul has admitted to, and this time he was not lying. If you are upset with the civil action, you’re going to really be mad when the criminal charges start flying. And from the preliminary reports, there are going to be a lot of them.

I became an affiliate in April just a few months ago ,was starting to build my business and became an exectutive diamond affiliate in about 40 days. I listened to paul burks and dawn on many webinars hours and hours and always had a felling that this was an honest man and developed something for the average person to help people find an income with a business model that made alot of sence to me if they were telling the whole truth about the money they were bringing in in the penny auction business. This is were the truth is or isn’t! We went to presentations and were told that the penny auctions were so profitable for example a person getting a watch for 300.00 that was worth 895.00 was happy winning this after bidding and the company would bring in 30,000 on that same watch because for each penny that was spent on the auction there was an affiliate that spent 1.00 to purchase that bid the whole business moel made sence to me if they were bring in the money on the auction that was told to us . The S.E.C. doesnt mention the auction itself so maybe it was a big scam, I never took out any money my family lost my downline affiliates lost .troy dooley on his blog radio show said they were getting so much traffic to the auction site they could fill up Dallas Cowboy Stadium six times a week with new traffic. This was the most exciting business model sold to the world that will ever be everyone that got in this company was happy there were hurdles the e-wallets the cks going in were backed up but these people up in North Carolina built an empire in a few months! When i started in April we had around 260,000 affiliates that grew to a million by August it was incredable . I was on my computer with these people andmy upline and I can honestly tell you we were all exited accounts were going up no matter what is said about Paul Burks I would listen to him on the internet and he didn’t have a way about him that you could see him as a scam artist and planning an exit strategy. The only question that I need answered is was the auction itself making the money we were all getting paid If not then the whole thing was a sham if they were making money on the auction site then its a beautiful thing we are all goin to miss Pau,Dawn and the crew take care

I became an affiliate in April just a few months ago ,was starting to build my business and became an exectutive diamond affiliate in about 40 days. I listened to paul burks and dawn on many occasions many webinars hours and always had a felling that this was an honest man and he developed something for the average person to help people find an income with a business model that made alot of sence to me, if they were telling the whole truth about the money they were bringing in in the penny auction business. This is were the truth is or isn’t! We went to presentations and were told that the penny auctions were so profitable for example a person getting a watch for 300.00 that was worth 895.00 was happy winning this after bidding and the company would bring in 30,000 on that same watch because for each penny that was spent on the auction there was an affiliate that spent 1.00 to purchase that bid the whole business model made sence to me if they were bringing in the money from the auction that was told to us . The S.E.C. doesnt mention the auction itself so maybe it was a big scam, I never took out any money my family lost my downline affiliates lost .Troy Dooley on his blog radio show said they were getting so much traffic to the auction site they could fill up Dallas Cowboy Stadium six times a week with new traffic. This was the most exciting business model sold to the world that will ever come again everyone that as in this company was happy there were hurdles the e-wallets the cks going in were backed up but these people up in North Carolina built an empire in a few months! When i started in April we had around 260,000 affiliates that grew to a million by August it was incredable . I was on my computer with these people and my upline and I can honestly tell you we were all excited, accounts were going up no matter what is said about Paul Burks I would listen to him on the internet and believe he didn’t have a way about him that you could see he was not a scam artist and planning an exit strategy. The only question that I need answered is was the auction itself making the money we were all getting paid If not then the whole thing was a sham if they were making money on the auction site then it was a beautiful thing we are all going to miss Paul,Dawn and the crew take care